How Unsecured Personal Loans Work
Unsecured loans allow you to borrow money for anything that you want. The funds that you receive from an unsecured personal loan can be used to start a business, consolidate debt or to make an expensive purchase.
Before you decide to take an unsecured loan you need to understand how they work and what the alternatives would be.
Unsecured Personal Loan
When a loan is unsecured it means that the loan is not tied to any property or collateral. This then means that the loan is not secured against your home for instance, which means that if you fail to make your payments your home would be at risk. An unsecured personal loan is then less risky for the borrower.
The lenders however are at more risk. If things go wrong with the loan they will not be able to recoup the loan through the sale of your property. As the lender will take on more risk the interest rates charged are higher than secured loans.
The major factor that will determine if you will get an unsecured loan is your credit. If your credit is good then your interest rate will be lower and you will have more options. If you have bad credit then you might need the help of a co-signer to get approved for a loan.
Types of Unsecured Loans
Here are the types of unsecured personal loans that you are able to get.
This is the most basic of the loans and is secured with just your signature. You are able to get these loans from banks and credit unions and the money can be spent on whatever you want. This type of personal loan is paid back in fixed monthly installments. If you have good credit then this is a good choice as the interest rate is usually low.
With a credit card you will have a pool of money available. You will not get a lump sum at the beginning of the loan, but rather borrow what you need and are able to borrow up to the credit limit.
The interest rate on credit cards though is quite high and you can easily get into trouble with credit cards.
This is where you will borrow money from individuals instead of borrowing from a traditional lender like a bank. There are many websites that will allow you to post a loan request and you will then wait to see if people will or will not step in and fund your loan.
These will have a fixed monthly installment and carry competitive interest rates.